Thursday, October 9, 2008

A Sound Proposal

There is a growing concensus that the US needs to move quickly to help recapitalize banks (that is, give them money to keep operating while taking shares of stock in return). The question is how best to do this? How will the government know how much to pay, and how will it avoid wasting funds on banks that are beyond salvage (so-called "Zombie banks")?

Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date.This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.

In short, the government should put on the table a standing offer to match private investors dollar for dollar when they offer to invest in a bank. If Warren Buffett offers to buy shares of bank X, the government matches the offer. This way, the market sets the price rather than having the government determining what to buy and how much to pay.

I hope someone who matters is listening. Mankiw is a former Chair of the Council of Economic advisors and can probably still get his calls returned even though he has been back in Cambridge, MA, for several years now.

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Federalist #37

It is a misfortune, inseparable from human affairs, that public measures are rarely investigated with that spirit of moderation which is essential to a just estimate of their real tendency to advance or obstruct the public good; and that this spirit is more apt to be diminished than promoted, by those occasions which require an unusual exercise of it.

About The People's Business

I'm a lawyer working in Washington, DC with a specialty in public policy issues. Previously, I spent over 10 years working on Capitol Hill, which left me fascinated about the process by which policy is made and executed. At the same time, I was put off by a lot of the grandstanding, mistruths and especially the nastiness of contemporary politics.
This blog is my small contribution to addressing these shortcomings. Its premise is that we have the politicians we deserve, and that voters could use some help by learning how politics really works and what they should really focus on when making an informed decision.
I can be reached at: the.peoples.business@gmail.com